Right Analogy, Wrong Timing

Should the government budget the way families do? Here’s an excerpt from Paul Krugman’s latest column:

One striking example of this rightward shift came in last weekend’s presidential address, in which Mr. Obama had this to say about the economics of the budget: “Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.”

That’s three of the right’s favorite economic fallacies in just two sentences. No, the government shouldn’t budget the way families do; on the contrary, trying to balance the budget in times of economic distress is a recipe for deepening the slump. Spending cuts right now wouldn’t “put the economy on sounder footing.” They would reduce growth and raise unemployment. And last but not least, businesses aren’t holding back because they lack confidence in government policies; they’re holding back because they don’t have enough customers — a problem that would be made worse, not better, by short-term spending cuts.

Actually, the government should budget the way families should. It’s just not clear that families actually do what they should. Both families and the government should budget countercyclically — their savings rates should be higher during periods of growth than during periods of economic decline, so that their consumption can remain steady across booms and busts. The problem that both the government and families are having today is that neither one saved enough during the most recent boom, and so both are having to cut back more than would be ideal during this protracted downturn.

Given what the families (and the private sector more broadly) is doing, I agree with most of what Brad DeLong has now deemed the “Hippie Caucus” suggests the government should do — continued government spending while labor and capital are underemployed and underutilized. (In fairness, I was a chartermember of this caucus.) My only break with the caucus is that I believe that all of the active countercyclical stimulus should come in the form of public investment to close the $1 trillion gap in our infrastructure needs (a total need of $2.2 trillion, only about half of which is likely to be appropriated over five years). No tax giveaways. No grants to states who budgeted particularly badly (loans would be okay). Just build what we need.

In fairness to the Obama Administration, it inherited a recession, which has been followed, predictably, by a jobless recovery. We have not gotten to see the Obama Administration during a boom to see whether it would budget during an upturn the way both families and the government should.

Andrew Samwick is a professor of economics and Director of the Nelson A. Rockefeller Center at Dartmouth College in Hanover, New Hampshire.

He is most widely known for his work on the economics of retirement, and his scholarly work has covered a range of topics, including pensions, saving, taxation, portfolio choice, and executive compensation.

In July 2003, Samwick joined the staff of the President's Council of Economic Advisers, serving for a year as its chief economist and helping to direct the work of about 20 economists in support of the three Presidential appointees on the Council.